Carr’s Group — Cautious optimism

Carr’s Group (LSE: CARR)

Last close As at 20/06/2024

GBP1.40

−0.50 (−0.36%)

Market capitalisation

GBP133m

More on this equity

Research: Industrials

Carr’s Group — Cautious optimism

Cyclical weakness in Carr’s Group’s Speciality Agriculture business has affected the company’s fortunes of late. However, the new management team, a strong net cash balance sheet and a record order book in the Engineering division offer optimism. Operational progress, particularly a reversal of fortunes in Speciality Agriculture, should rebuild confidence and a reduction in the current discount to our view of the underlying value.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Carr’s Group

Cautious optimism

Full-year results

General industrials

2 January 2024

Price

100p

Market cap

£95m

Net cash (£m) at 2 September 2023

4.2

Shares in issue

94.2m

Free float

68.9%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.6)

(24.4)

(19.2)

Rel (local)

(3.1)

(25.7)

(20.3)

52-week high/low

149.75p

93.80p

Business description

Carr’s Group’s Speciality Agriculture division serves farmers in the UK, Ireland, the US, Germany, Canada and New Zealand with feed blocks and feed supplements. The Engineering division offers remote handling equipment and fabrications to the global nuclear and oil and gas industries.

Next events

AGM

February 2024

Analyst

David Larkam

+44 (0)20 3077 5700

Carr’s Group is a research client of Edison Investment Research Limited

Cyclical weakness in Carr’s Group’s Speciality Agriculture business has affected the company’s fortunes of late. However, the new management team, a strong net cash balance sheet and a record order book in the Engineering division offer optimism. Operational progress, particularly a reversal of fortunes in Speciality Agriculture, should rebuild confidence and a reduction in the current discount to our view of the underlying value.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/22

124.2

11.2

10.0

5.2

10.0

5.2

08/23

143.2

7.5

6.2

5.2

16.1

5.2

08/24e

148.9

8.8

7.5

5.2

13.3

5.2

08/25e

154.8

10.6

9.0

5.4

11.1

5.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY23 results

Sales increased 15% to £143m primarily due to strong positive pricing in the Speciality Agriculture division (sales +19%) although volumes were lower, while Engineering (sales +10%) benefited from a strong H2. Group operating margins declined 400bp to 5.6% primarily due to lower volumes in the Speciality Agriculture division, down 16%, and input price pressure, whereas Engineering profitability was broadly flat. Underlying PBT of £7.5m was 33% lower and underlying EPS of 6.2p declined 38%. The dividend was held at 5.2p. The balance sheet improved to net cash of £4.2m, primarily due to the disposal of the Agricultural Supplies division. A further £4m of deferred consideration has been received since the year end.

Outlook and forecasts

The Engineering division has a record order book (£60m) and c 85% cover for the current year, underpinning expectations of good progress. Speciality Agriculture had an improved first quarter of FY24 with UK volumes up 20%. However, cost pressures remain, which suggests a prudent view is needed. To reflect this, we have reduced our FY24 forecasts (PBT £9.7m to £8.8m -9.9%, EPS 7.8p to 7.5p 3.5%, DPS 5.3p to 5.2p -1.9%) and introduced estimates for FY25 (PBT £10.6m, EPS 9.0p, DPS 5.4p).

Valuation: Speciality Agriculture remains key

Our discounted cashflow valuation (DCF) is 149p per share, while our peer group derived sum-of-the-parts (SOTP) is lower at 124p. This reflects the current weakness in the Speciality Agriculture business and the short-term profitability metric used within our SOTP valuation. We believe our DCF valuation is more reflective of the true underlying value of Carr’s. This discrepancy also highlights what we see as the key catalyst to value appreciation, the performance of the Speciality Agriculture division, which was also a clear driver of the shares’ underperformance in 2023.

Full-year results

Overview

Sales increased 15% due to positive pricing in the Speciality Agriculture and a strong H2 in Engineering. Margins declined 400bp, primarily due to softness in volumes and cost pressures in the Speciality Agriculture division, leading to a 33% decline in underlying EBIT and PBT. Reported PBT included amortisation of intangibles of £0.9m, restructuring and cloud configuration/customisation costs of £1.2m and goodwill and intangible impairment of £3.8m. The full-year dividend was held at 5.2p. The balance sheet improved to a net cash position, due to receipt of the majority of the proceeds from the sale of the Agricultural Supplies division.

Exhibit 1: FY23 summary results (£m)

 

2022

2023

Change

Sales

124.2

143.2

15%

Operating margin

9.6%

5.6%

4.0%

Underlying operating profit

11.9

8.0

-33%

Underlying PBT

11.2

7.5

-33%

Reported PBT

7.6

1.5

-80%

Underlying EPS (p)

10.0

6.2

-38%

Reported EPS (p)

6.4

0.4

N/A

Dividend per share (p)

5.2

5.2

0%

Net debt/(cash)

14.1

(4.2)

N/A

Source: Carr’s Group

Engineering division

Exhibit 2: Performance summary

Exhibit 3: Year-end order book (£m)

Source: Carr’s Group

Source: Carr’s Group

Exhibit 2: Performance summary

Source: Carr’s Group

Exhibit 3: Year-end order book (£m)

Source: Carr’s Group

Sales increased 9.6% although profits declined 1.5% to £5.3m due primarily to the mix of business, with fabrication and precision engineering strong, up 16%, while robotics sales were weaker. The business had a particularly strong H2 when profits were 24% higher and the order intake increased to a record £59.8m, up 47%. While the order book includes multi-year contracts such as the £10m contract for the UK’s National Nuclear Laboratory, it provides a very healthy c 85% coverage for expected FY24 sales.

Speciality Agriculture division

Exhibit 4: Performance summary

Exhibit 5: UK Agriculture pricing trends

Source: Carr’s Group

Source: UK National Statistics, Carr’s Group

Exhibit 4: Performance summary

Source: Carr’s Group

Exhibit 5: UK Agriculture pricing trends

Source: UK National Statistics, Carr’s Group

Sales increased 19% due to strong pricing, with the average feed block pricing up 21%, while volumes declined 16%. In the UK, farmers reacted to wide-ranging cost inflation (in diesel, fertiliser etc) and used warmer weather to extend outdoor grazing to reduce the requirement for feed blocks, while the US business continued to suffer from a reduced calf headcount of up to 40% due to prolonged drought conditions. Margins declined by 570bp as a result of the lower volumes and input cost pressures. A new management team is largely in place, targeted to deliver improved performance. The first three months of FY24 have seen volumes in the UK up 20%. With agriculture costs and input prices appearing to have peaked, this provides a reason to be cautiously optimistic for FY24.

Cash flow

Exhibit 6: FY23 cash flow summary (£m)

EBITDA

7.1

Working capital

(4.7)

Exceptional & other

(0.1)

Tax

(0.3)

Net operating cash flow

 

2.0

Investment activities

(3.3)

Acquisitions/disposals

25.6

Net interest

(0.8)

Equity financing

0.2

Dividends

(4.9)

Net cash flow

18.8

Source: Carr’s Group

Operating cash inflow of £2.0m reflected lower profitability and £4.7m of working capital outflow due to increased inventories for the Speciality Agriculture division and increased receivables reflecting the strong second half in Engineering. Receipt of the disposal funds left the group with net cash of £4.2m, up from net debt of £14.1m at the end of FY22. The cash balance has been enhanced since the year end by receipt of a further £4m of deferred consideration.

Outlook

The new financial year has started positively. The strong order book in Engineering (£60m) provides 85% cover for the year, with margins expected to benefit from additional volume and mix towards the higher value-added robotics activities. Speciality Agriculture had an improved Q1 in the UK with volumes up 20%. With management expecting a more normal seasonal pattern, that is, no repeat of the losses in H2, and cost pressures in agriculture abating the fundamentals point to an improved performance. However, this starts from a low point given the difficult H2, which suggests there should be a degree of caution.

Forecasts

We have reduced our FY24 forecasts to reflect a shallower recovery profile in the Speciality Agriculture business, but we note the positive start to the current financial year. We have also introduced forecasts for FY25.

Exhibit 7: Forecasts (£m)

FY24e

FY25e

Old

New

Change

Old

New

Change

Speciality Agriculture revenues

92.0

90.8

-1.3%

-

90.8

N/A

Engineering revenues

59.0

58.2

-1.4%

-

64.0

N/A

Group revenues

151.0

148.9

-1.4%

-

154.8

N/A

Speciality Agriculture EBITA including JVs

6.5

5.4

-17.6%

-

6.0

N/A

Engineering EBITA

6.5

6.4

-1.6%

-

7.4

N/A

Central costs

(2.9)

(2.8)

-2.8%

-

(2.6)

N/A

Group EBITA

10.1

9.0

-11.5%

-

10.8

N/A

Net finance costs

(0.4)

(0.2)

-50.0%

-

(0.2)

N/A

Normalised PBT

9.7

8.8

-9.9%

-

10.6

N/A

Normalised undiluted EPS (p)

7.8

7.5

-3.3%

-

9.0

N/A

Dividend per share (p)

5.3

5.2

-1.9%

-

5.4

N/A

Net debt/(cash)

(9.9)

(10.9)

10.0%

-

(14.3)

N/A

Source: Edison Investment Research


Strategy and management changes

Strategy

After the disposal of the Agricultural Supplies business, the focus is now on operational improvements and growth in the core Engineering and Speciality Agriculture divisions. In Engineering, this involves contract execution and addressing growth opportunities. In Speciality Agriculture, the focus is on returning to previous operating margins (FY21 operating margin ex JVs 12.4% versus FY23 4.5%) through both internal actions and leveraging the business’s strong brands in the market to promote volumes and pricing. These actions are supported by new management, including a new position of group transformation officer, and a new team in the UK Speciality Agriculture business. We expect to hear further details of the actions being undertaken in due course.

Management changes

The board and executive management have been refreshed since the strategic review and disposal of the Agricultural Supplies division. The key appointments over the last year have been:

Non-executive chair. Tim Jones joined the board as chair in February 2023.

Non-executive director and senior independent director. Gillian Watson joined as NED in October 2023, subsequently taking over the role of senior independent director.

Chief executive. David White was appointed in November 2023, having joined the group as CFO in January 2023.

Chief financial officer. Gavin Manson joined the group as CFO in November 2023 in a non-board position.

Executive director of transformation. Martin Rowland was appointed in November 2023 having been a non-executive director since March 2023.


Valuation

The different operating profile of the two divisions provides an added complexity to valuing the group, particularly from a relative peer group perspective. Hence, we use an ‘activity agnostic’ discounted cashflow valuation alongside a peer group valuation that considers the two activities separately.

Discounted cashflow

Our DCF is based on a five-year forecast cash flow and terminal valuation. Exhibit 8 shows our DCF valuation per share relative to two key variables: the cost of capital (WACC) and terminal growth rate assumptions. Using a 10% WACC, relatively high due to the positive cash position, and a 2.0% terminal growth rate gives an indicative value of 149p per share.

Exhibit 8: DCF valuation (per share, p)

Terminal growth rate

Cost of capital (WACC)

8.0%

9.0%

10.0%

11.0%

12.0%

0.0%

160

140

123

110

100

1.0%

179

154

135

119

107

2.0%

205

173

149

130

115

3.0%

241

197

167

143

126

4.0%

295

232

190

161

139

Source: Edison Investment Research

Peer group comparison

Our peer group valuation considers the two divisions separately before combining them to generate an overall valuation for the group. The valuation is based on EV/EBIT multiples to ensure there is no impact from the financial structure of the peers.

Exhibit 9: Peer valuations

Share price

Market Cap

EV/EBIT

P/E

EBIT margin

p

£m

2023

2024

2023

2024

2023

2024

Engineering

Avingtrans PLC

390

128.3

31.1

20.9

139.3

63.9

2.7%

3.4%

MPAC Group PLC

260

53.2

6.2

4.2

10.0

6.8

7.0%

9.2%

SRT Marine Systems PLC

41.5

87.9

11.3

7.2

11.5

8.0

11.3%

11.9%

Synectics PLC

147.5

26.2

10.2

6.7

11.3

8.8

5.0%

6.9%

James Fisher and Sons PLC

308

155.5

11.8

9.7

16.0

10.0

5.7%

6.6%

Pressure Technologies PLC

31

12.0

33.8

42.2

40.4

23.8

1.6%

1.2%

Ab Dynamics PLC

1790

410.6

23.6

22.4

32.9

31.2

16.1%

15.9%

Judges Scientific PLC

9120

603.3

17.6

16.6

25.2

23.8

27.1%

27.1%

Renold PLC

35.05

79.0

4.0

4.3

5.2

5.7

10.8%

10.0%

Median

10.8

9.7

13.7

10.0

8.9%

9.2%

Agriculture

Anpario PLC

257.5

52

13.9

12.1

24.1

20.0

8.6%

9.1%

Benchmark Holdings PLC

34.05

252

30.3

15.3

151.3

46.6

5.8%

10.1%

Genus PLC

2170

1433

19.6

16.5

25.3

21.0

11.6%

12.9%

Wynnstay Group PLC

345

79

6.4

5.8

10.3

9.3

1.4%

1.6%

Median

17.6

12.4

25.3

21.0

6.8%

9.1%

Source: Refinitiv 29 December 2023

Exhibit 10: Peer group SOTP valuation

FY24 EBIT (£m)

Multiple (x)

Value (£m)

Speciality Agriculture

5.6

12.4

69.5

Engineering

6.4

9.7

62.4

Central costs

(2.8)

8.0

(22.4)

EV

109.5

Net cash inc deferred from disposal

8.2

Equity value

117.7

Number of shares – fully diluted (m)

95

Indicative value per share (p)

124

Source: Edison Investment Research

Overall

Both methodologies suggest a valuation above the current share price. We also note that the DCF valuation is somewhat higher than the SOTP. This reflects the current weak performance in the Speciality Agriculture business. This hinders the SOTP valuation, which is based on short-term profitability, whereas the DCF longer-term valuation takes into account the expected recovery to historic levels of profitability. Hence, we see our DCF valuation as more reflective of the group’s inherent value.

Exhibit 11: Financial summary (continuing businesses only)

£m

2022

2023

2024e

2025e

Year end 31 August

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

restated

Revenue

 

 

124.2

143.2

148.9

154.8

EBITDA

 

 

13.0

7.1

12.4

14.2

Operating profit (before amort. and excepts.)

 

11.9

8.0

9.0

10.8

Amortisation of acquired intangibles

(0.9)

(0.9)

(0.9)

(0.9)

Exceptionals

(2.7)

(5.0)

0.0

0.0

Reported operating profit

8.2

2.0

8.0

9.8

Net Interest

(0.7)

(0.4)

(0.2)

(0.2)

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

11.2

7.5

8.8

10.6

Profit Before Tax (reported)

 

 

7.6

1.5

7.8

9.6

Reported tax

(1.5)

(1.1)

(1.7)

(2.1)

Profit After Tax (norm) - continuing businesses

9.4

9.4

5.8

7.0

Profit After Tax (reported) - continuing businesses

5.8

6.0

0.4

6.1

Average Number of Shares Outstanding (m)

93.1

93.9

94.2

94.2

EPS - normalised (p)

 

 

10.0

6.2

7.5

9.0

EPS - basic reported (p)

 

 

6.4

0.4

6.5

8.0

Dividend (p)

5.20

5.20

5.20

5.40

EBITDA Margin (%)

10.5

5.0

8.3

9.2

Normalised Operating Margin (%)

9.6

5.6

6.0

6.9

BALANCE SHEET

Fixed Assets

 

 

83.2

73.9

72.5

67.3

Intangible Assets

28.2

22.5

21.5

20.6

Tangible Assets

41.4

37.3

36.8

32.6

Investments & other

13.6

14.1

14.1

14.1

Current Assets

 

 

224.3

86.1

93.1

96.1

Stocks

27.0

26.6

26.6

27.1

Debtors

26.6

32.5

32.6

31.8

Cash & cash equivalents

22.5

23.1

29.9

33.3

Other

148.3

3.9

3.9

3.9

Current Liabilities

 

 

(139.9)

(36.9)

(38.0)

(38.4)

Creditors

(23.4)

(21.8)

(22.9)

(23.3)

Tax and social security

(0.7)

(0.1)

(0.1)

(0.1)

Short term borrowings including finance leases

(14.2)

(15.0)

(15.0)

(15.0)

Other

(101.6)

(0.0)

(0.0)

(0.0)

Long Term Liabilities

 

 

(35.3)

(15.3)

(15.3)

(15.3)

Long term borrowings including finance leases

(29.9)

(10.8)

(10.8)

(10.8)

Other long-term liabilities

(5.4)

(4.5)

(4.5)

(4.5)

Net Assets

 

 

132.3

107.9

112.3

109.7

CASH FLOW

Operating Cash Flow

13.0

7.1

12.4

14.2

Working capital

(8.7)

(4.7)

0.9

0.8

Exceptional & other

0.1

(0.1)

0.2

0.3

Tax

(0.8)

(0.3)

(1.7)

(2.1)

Net Operating Cash Flow

 

 

3.7

2.0

11.9

13.3

Investment activities

(4.0)

(3.3)

(4.0)

(5.0)

Acquisitions/disposals

(0.4)

25.6

4.0

0.0

Net interest

(0.8)

(0.8)

(0.2)

0.0

Equity financing

0.4

0.2

0.0

0.0

Dividends

(4.7)

(4.9)

(4.9)

(4.9)

Other

13.1

0.0

0.0

0.0

Net Cash Flow

7.2

18.8

6.8

3.4

Opening net debt/(cash)

 

 

25.4

21.6

2.7

(4.1)

FX

0.3

(0.2)

0.0

0.0

Other non-cash movements

(3.7)

0.3

0.0

0.0

Closing net debt/(cash)

 

 

21.6

2.7

(4.1)

(7.5)

Finance leases

7.5

6.8

6.8

6.8

Closing net debt/(cash) excluding finance leases

14.1

(4.2)

(10.9)

(14.3)

Source: Company data and Edison Investment Research

  


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This report has been commissioned by Carr’s Group and prepared and issued by Edison, in consideration of a fee payable by Carr’s Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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London, WC1R 4PS

United Kingdom

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Research: Metals & Mining

Alkane Resources — Boda continuing to add value

Following an extensive drilling campaign, on 14 December, Alkane announced an update to its Boda mineral resource estimate to include Boda Two and Three, as expected in Q423. The result of the update was a 30% increase in the gold grade and a 22% (or 1.17Moz) increase in contained gold at Boda, which we value at US$28.2m (4.7 US cents or 7.0 Australian cents per share). The Boda deposit remains open at depth and along strike and a subsequent resource update at Kaiser is anticipated in late Q1 CY24 as well as a conceptual mine plan at the combined Kaiser-Boda deposit in due course.

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